You Make the Call - Aug. 31, 2023

Question: Last year, Josh decided to take out a reverse mortgage on his home. He used the loan funds to make substantial improvements to his home. No principal or interest payments were required on the reverse mortgage loan during the year. However, Josh made a $3,000 payment, which consisted of $2,000 applied toward the principal and $1,000 toward the accrued interest. Assuming he is otherwise eligible to itemize on Schedule A (1040), Itemized Deductions, will this payment of interest be a qualified mortgage interest deduction?

Answer: Yes. Although reverse mortgages are generally considered home equity loans, for which the interest is nondeductible for tax years 2018-2025, if the reverse mortgage loan proceeds are used to substantially improve the residence, the interest is deductible as qualified residence mortgage interest when paid. This treatment is allowed even if the interest payment is not actually required to be made at the time of the payment.